When an individual agrees to become a guarantor for a loan, they essentially take on the legal responsibility to repay the debt if the primary borrower fails to do so. This role is formalised in the loan agreement, and from the perspective of financial institutions, the guarantor is considered a secondary source for repayment if necessary.

Connection to Credit Profile

Once a person becomes a guarantor, the loan is linked to their credit profile along with that of the primary borrower. This means the loan details, including outstanding amount and repayment status, may reflect in the guarantor’s records with credit bureaus such as CIBIL.

Impact of EMI Defaults on CIBIL Score

Although the responsibility for paying monthly instalments (EMIs) lies initially with the borrower, any failure on their part to repay on time can directly impact the guarantor. If the borrower defaults, the lender can approach the guarantor to recover dues, and in such situations, the missed payments and default status get recorded under the guarantor’s credit history as well.

Risks to Creditworthiness

Defaults or delayed payments on the loan by the primary borrower can lower the credit score of the guarantor, even if they have not borrowed the money themselves. A drop in a guarantor’s credit score may affect their future eligibility for loans, credit cards, or other financial services. Furthermore, lenders may assess existing guarantor liabilities when evaluating an application for fresh credit.

Due Diligence Before Agreeing

Before becoming a guarantor, it is important to assess the financial credibility of the borrower. Understanding their repayment capacity and history can help reduce the risk of future defaults. Guarantors should also be aware that their liability remains in place until the loan is fully repaid or legally released by the lending institution.

Legal and Financial Implications

Agreeing to be a guarantor is a legally binding commitment under Indian financial law. If the borrower fails to repay and the guarantor also does not fulfill the responsibility, the lender has the legal right to recover the outstanding amount from the guarantor’s assets, if necessary. This may include legal proceedings depending on the terms agreed upon in the loan contract.

Monitoring the Loan Account

It is advisable for guarantors to regularly monitor the loan repayment status to ensure that EMIs are being paid on time. Proactive involvement can help address repayment issues early, preventing damage to the guarantor’s credit standing. Being vigilant can also assist in maintaining a healthy financial profile until the loan account is satisfactorily closed.

Considerations for Financial Planning

Becoming a guarantor should be a considered decision, keeping in mind personal financial goals and obligations. This role may have long-term implications on one’s credit report and loan eligibility. Consulting with a financial advisor before agreeing to become a guarantor can provide clarity and help in making an informed decision.

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